Amortization of multifamily and tax on capital gains

Tax, SDIRAs & Cost Segregation
7yFollow

Amortization of multifamily and tax on capital gains

Alessandro Cardito
Hoboken, NJ · Member since 2017 · 33 posts · 9 votes

I’m planning on buying a three family house- rent two units and live in the third.

I plan to depreciate the building to lower my tax burden on a yearly basis.

Assuming I live there for 3 years and then sell it I would not pay taxes on the capital gains from the sale - that seems to me like a winning strategy as I lower my tax burden on the rent and do not have to pay it when I sell...am I right or am I missing something?

0Reply
20 views

Most Popular Reply

Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Alessandro Cardito:

I’m planning on buying a three family house- rent two units and live in the third.

I plan to depreciate the building to lower my tax burden on a yearly basis.

Assuming I live there for 3 years and then sell it I would not pay taxes on the capital gains from the sale - that seems to me like a winning strategy as I lower my tax burden on the rent and do not have to pay it when I sell...am I right or am I missing something?

 Yes you are missing.

Duplex and and up, you don't get full exclusion for sec 121. You have to prorate the gain. If you were renting a room in SFH, then you would get full exclusion on capital gain per sec 121.

Also, depreciation is not optional.

[email protected]941-914-7779
INVESTOR FRIENDLY CPA®4.9242 Reviews
WebsiteView Page
TaxMD® | Tax Planning Software
WebsiteView Page
2Reply
See this reply in the discussion

7 Replies

Jump to latestLatest
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Alessandro Cardito:

    I’m planning on buying a three family house- rent two units and live in the third.

    I plan to depreciate the building to lower my tax burden on a yearly basis.

    Assuming I live there for 3 years and then sell it I would not pay taxes on the capital gains from the sale - that seems to me like a winning strategy as I lower my tax burden on the rent and do not have to pay it when I sell...am I right or am I missing something?

     Yes you are missing.

    Duplex and and up, you don't get full exclusion for sec 121. You have to prorate the gain. If you were renting a room in SFH, then you would get full exclusion on capital gain per sec 121.

    Also, depreciation is not optional.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®4.9242 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    2Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    Agreed.  Assuming all three units are relatively equal in value, you get the exemption (and no depreciation) only on the 1/3 that you live in....the other two units are treated as a separate investment property.

    But, it’s still a smart way to go.

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    What they said. 

    The easiest way to think of this is that you now own 3 properties. 

    2 are rentals. 

    1 is your primary. 


    They just all happen to be attached to each other. 

    Also the "plan to depreciate to lower your tax burden" - Important to reiterate that depreciation is not optional. You need to take it on the portion related to those 2 rental units. When you sell you'll get taxed as though you took it, whether you really did or not. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    1Reply
  • Alessandro Cardito
    OP
    Hoboken, NJ · Member since 2017 · 33 posts · 9 votes
    7y

    @Natalie Kolodij thanks Natalie and everyone for the answer- where I’m puzzled is how will I split the capital gain across units- I plan to over invest in my unit and leave the other two as they are- will I be able to reflect the higher investment in my unit vs the other 2?

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y
    Originally posted by @Alessandro Cardito:

    @Natalie Kolodij thanks Natalie and everyone for the answer- where I’m puzzled is how will I split the capital gain across units- I plan to over invest in my unit and leave the other two as they are- will I be able to reflect the higher investment in my unit vs the other 2?

    Say you spent $300k buying this property, and the 3 units are roughly the same. Then you spent $100k on the personal part and $200k on the rental part. Your investment, aka tax basis, is $100k and $200k, respectively.

    Now you spend $20k upgrading your unit. Your basis in your personal unit is now $120k, and your basis in your business units remains $200k.

    5 years later, you sell the entire property for $450k, or $150k per unit. On your personal unit, you have a capital gain of $30k ($150k - $120k), which is not taxable because you lived there yourself. On your business units, you have a capital gain of $100k (2 x $150k - $200k) which is taxable.

    I intentionally did not address depreciation or closing costs, to not make it more complicated.

    1Reply
  • Alessandro Cardito
    OP
    Hoboken, NJ · Member since 2017 · 33 posts · 9 votes
    7y

    @Michael Plaks great example thanks! For equal units this is easy, however he unit I would occupy would be 40%bigger and have a garden- I feel the value increase would be open to interpretations and depends also on the buyer ( is a developer wouldn’t care but a owner occupier would)

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    You or your cpa have to come up with a reasonable, defensible, percentage that is your primary verses the other two units.  SF would probably be a safe way to go.  You’ll need to do this in the beginning for depreciation purposes.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free